Nebraska and Iowa have made recent significant changes to their tax codes in an effort to boost competitiveness and attract businesses. These changes include revisions to tax rates, modifications to credits, and the introduction of the Pass-Through Entity Tax (PTET). This article provides a comprehensive analysis of the legislative tax updates in Nebraska and Iowa, exploring the implications for businesses and individuals in both states.
Changes in Tax Rates
Nebraska Governor, Jim Pillen, has signed two tax cut bills, LB243 and LB754, into law. These bills aim to bring transformational tax reform for Nebraskans and provide billions in property, business, and income tax relief for Nebraska businesses, farmers, ranchers, and taxpayers.
LB243 focuses on increasing property tax relief, establishing a cap on school district’s property tax requests, eliminating the 5% cap on school district tax credit growth, and providing state aid to community colleges.
On the other hand, LB754 aims to reduce the top individual and business income tax rates to 3.99% by 2027, deliver full tax exemption for Social Security benefits a year early in 2024, and provide tax credits related to child care for families and providers. These tax cuts are intended to make Nebraska more competitive nationally and put more dollars into everyday Nebraskans' pockets.
By implementing LB754, Nebraska would significantly improve its ranking in terms of personal and corporate income tax rates. Currently, the state lags behind, but with the proposed reductions, Nebraska would be among the top 15 states with the lowest tax rates, substantially improving its current position around 30th.
Iowa, too, has made changes to its tax code to remain competitive and attract businesses. Governor Kim Reynolds signed a bill that reduced the top corporate rate from 9.8% to 8.4%. This is a result of the state achieving revenue goals earlier than expected. Furthermore, the state plans to gradually decrease the corporate income tax rates until they reach 5.5% for all corporate taxable income. Starting in 2026, Iowa will implement a flat rate of 3.9% for individual income taxes.
The reduction in corporate and individual income tax rates in Iowa aims to stimulate economic growth, encourage business investment, and create a favorable business environment that drives job creation and increases overall economic activity.
State and Local Tax Updates
Sales Tax Rate Changes
In addition to changes in income tax rates, both Nebraska and Iowa have implemented updates to their sales and use tax rates. These changes aim to streamline the tax structure and generate revenue for essential services and infrastructure development.
The Nebraska state sales and use tax rate is 5.5%. More information on changes in local sales and use tax rates is listed here.
The Iowa state sales and use tax rate is 6%. A complete list of local sales and use tax rates is listed here.
These adjustments reflect the state's commitment to maintaining a sustainable tax structure while supporting economic growth.
Nebraska Opportunity Scholarship Credit
Nebraska Governor Jim Pillen officially approved Legislative Bill 753 on May 30, 2023. This bill, known as the "Opportunity Scholarships" initiative, allows for tax credits to support scholarships for private school education. Individuals and corporations can receive a dollar-for-dollar tax credit for donating to organizations that provide these scholarships.
The legislation initially sets aside $25 million for tax credits, but this amount could increase to $100 million based on demand. However, there are concerns from public school advocates who argue that taxpayer funds should be invested in public education instead.
Pass-Through Entity Tax (PTET)
What is the Pass-Through Entity Tax Provision?
Nebraska and Iowa have both enacted legislation related to the Pass-Through Entity Tax (PTET). PTET laws allow pass-through entities, such as partnerships and Subchapter S corporations, to elect to pay tax at the entity level rather than having the income pass through to individual owners.
The PTET provision provides an alternative tax structure to alleviate the impact of the federal $10,000 state and local tax deduction limitation, commonly known as the SALT cap. The cap refers to the limitation imposed on how much state and local tax you can deduct on Schedule A (Itemized Deductions) on federal income tax returns. The IRS capped the deduction at $10,000 for all for state and local income, sales, and property taxes individuals and married couples filing jointly ($5,000 for married individuals filing separately).
By electing to pay tax at the entity level, owners of pass-through entities can avoid the limitations imposed by the SALT cap and potentially reduce their overall tax liability.
Under the PTET laws in Nebraska and Iowa, eligible entities include partnerships and Subchapter S corporations. These entities can elect to pay tax at the entity level, providing potential tax benefits for their owners.
The PTET provision is particularly relevant for small and family-owned businesses, as they often face the challenges of the SALT cap. By electing to pay tax at the entity level, these businesses can potentially reduce their federal income tax burden and improve their overall financial position.
How It Works
The PTET provision shifts the tax liability from individual owners to the entity itself. This allows owners to avoid the limitations of the SALT cap and potentially reduce their federal income tax liability.
By electing to pay tax at the entity level, owners of pass-through entities can deduct the entity-level tax as a business expense, providing a potential tax benefit. This deduction is not subject to the limitations imposed by the SALT cap, making it an attractive option for businesses affected by it.
It’s important to note that the deduction occurs at the federal level, lowering the entity’s total taxable income. When the business pays the pass-through entity tax, the owners will receive a refundable credit on their personal state tax returns (for Iowa and Nebraska).
The legislative tax updates in Nebraska and Iowa have significant implications for businesses operating in these states. The revisions to tax rates, modifications to deduction limitations, and the introduction of the PTET provision provide opportunities for businesses to navigate the tax landscape more efficiently and potentially reduce their overall tax liability.
Overall, the tax updates in Nebraska and Iowa represent a commitment to creating a business-friendly environment and attracting investment to these states. By implementing these legislative changes, Nebraska and Iowa aim to enhance their competitiveness, promote economic growth, and provide tax relief to businesses and individuals. If you have any questions about these changes and how they affect you or your business, please contact us or learn more about our state and local tax services.
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